Multiple billionaire investors have put both their wallets and their words behind Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac (NASDAQOTCBB: FMCC ) and this week one announced he was upping his ownership to more than 11% of each.
The investment boost
Bill Ackman of Pershing Square Capital Management had two separate SEC filings placed this week which announced he has boosted his position in Fannie Mae and Freddie Mac by 13%, now owning 11.3% and 11.1%, respectively, of the publicly traded stock for the government sponsored entities.
Curiously, Ackman did not do this through the actual purchase of common stock, but instead entered into a total return swap agreement with UBS. In short, this is an agreement where UBS bought the additional stake in Fannie and Freddie on behalf of Ackman and Pershing Square. Pershing Square then pays UBS interest for the total cost of the stock purchase.
UBS will then pay Pershing Square for any positive performance in the shares of Fannie and Freddie, and conversely, Ackman would have to pay UBS for the negative performance.
The agreement is essentially a loan where Pershing will receive the possible rewards and risks of owning the common stock of Fannie and Freddie, except it doesn't have to tie up its own capital to do so.
Much has been made of the remarkable plummet seen less than a month ago by Fannie and Freddie following the announcement of the Senate Banking Committee's bi-partisan bill aimed to wind down the two government sponsored entities. In addition just last week, Maxine Waters of California, the ranking Democrat on the House Financial Services Committee put forth her own bill which would endeavor to create a co-op issuing the government-guaranteed housing loans.
Uniquely, the proposal by Waters seeks to create a system in which mortgage lending is structured more similar to a public utility. The Johnson-Crapo proposal, on the other hand, also seeks private capital, but instead hopes to mimic the Federal Deposit Insurance Corporation -- which backs all bank deposits through fees -- through the creation of the Federal Mortgage Insurance Corporation. Waters calls for a 5% backing by private enterprises, while Johnson and Crapo seek a 10%.
"Fannie Mae and Freddie Mac's return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether (they) need any reform at all," noted Waters in a statement of her bill. "I am hopeful that this legislation will continue to move the conversation on housing finance reform forward."
These bills, plus the Corker-Warner bill and others, have led many to question what the future of Fannie and Freddie will ultimately entail.
The unsaid answer
Much has been made of the recent string of legislation -- some bi-partisan and others distinctly partisan -- introduced by politicians surrounding the ultimate future of Fannie and Freddie, but the ultimate answer could be years away. In fact it may not even be in the hands of politicians, as Reuters notes, the Johnson-Crapo proposal, "would leave a decision on how to treat their private shareholders to the courts."
In adding to his common share stake -- remember this is different to the preferred shares held by other noted investors like Bruce Berkowitz -- Ackman in essence affirmed what he noted in February when he said he "is convinced shareholders will win their lawsuits against the U.S. government."
As with any traded stock, there must be both a buyer and seller, so we may find out someone took the opposite stance and decided to unload their entire position when the stocks plummeted by more than 30% a few weeks ago. However, investors now know that while Ackman may not have used words, his actions clearly display he still believes in the potential of Fannie and Freddie.
The one stock worth buying this year
There's a huge difference between a good stock and a stock that can make you rich, and there is no denying Fannie and Freddie had incredible runs in 2013. But one company could be poised for a similar run in 2014. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.